Note 7 - Regulatory Assets and Liabilities

The following table summarizes the components of the Company’s regulatory asset and liability balances at June 30, 2015 and December 31, 2014.

	June 30, 2015				December 31, 2014
	Current		Long-term		Current		Long-term

REGULATORY ASSETS
Recoverable cost of gas purchases	$	2,301,288	$	-	$	692,117	$	-
Deferred costs		489,996		1,470,008		489,996		1,715,006
Deferred loss on commodity swaps		304,425		-		2,872,385		-
Income taxes		-		296,819		-		296,819
Rate case costs		43,324		21,916		43,324		43,579
Total regulatory assets	$	3,139,033	$	1,788,743	$	4,097,822	$	2,055,404

REGULATORY LIABILITIES
Over-recovered gas purchases	$	1,446,654	$	-	$	925,175	$	-
Income taxes		-		83,161		-		83,161
Asset retirement costs		-		1,086,975		-		1,006,689
Total regulatory liabilities	$	1,446,654	$	1,170,136	$	925,175	$	1,089,850

Recoverable Cost of Gas Purchases/Over-recovered Gas Purchases

The Company accounts for purchased gas costs in accordance with procedures authorized by the utility commissions in the states in which it operates. Purchased gas costs that are different from those provided for in present rates, and approved by the respective commission, are accumulated and recovered (recoverable cost of gas purchases) or credited through future rate changes (over-recovered gas purchases). These amounts are generally recovered or credited through rates within one year. The gas cost recovery mechanisms are monitored closely by the regulatory commissions in all of the states in which the Company operates and are subject to periodic audits or other review processes.

Deferred Costs

On June 27, 2014, the Company’s Frontier Natural Gas subsidiary entered into a stipulation with the Public Staff of the North Carolina Utilities Commission (Docket No G-40, Sub 124), in which the subsidiary agreed, among other items, to reclassify $2.5 million from its recoverable cost of gas purchases asset account to a deferred gas cost asset account. This amount represents a portion of deferred expenses related to the subsidiary’s January and February 2014 gas purchases on which it will not earn return. The stipulation calls for amortization of this amount as operating expense over a five year period beginning July 1, 2014. Under the stipulation, the Public Staff agreed to not request a change in Frontier Natural Gas’s base margin rates, exclusive of cost of gas, for the same five-year period.

Deferred Loss on Commodity Swaps

The Company’s regulated subsidiaries defer recognition of unrealized losses and gains on its commodity swap derivative instruments as regulatory assets and liabilities, respectively. Deferred losses and gains are recognized as a component of Cost of sales – natural gas purchased on the Company’s Consolidated Statement of Comprehensive Income during the period in which they are settled and recovered through rates. This regulatory asset will be recovered by the end of July 2015.

Income Taxes

The regulatory asset related to income taxes earns a return equal to that of the Company’s rate base and will be recovered through rates. The regulatory liability related to income taxes will be credited to our customers.

Asset Retirement Costs

As a result of regulatory action by the PUCO, Orwell and Brainard accrue an estimated liability for removing certain classes of utility plant long-lived assets at the end of their useful lives. The liability is equal to a set percentage of the asset’s historic cost. These liabilities are accrued over the useful lives of the assets with the corresponding expense included as a portion of depreciation expense. Upon retirement of any assets included in these asset classes, any costs incurred to retire the asset will be recorded against this regulatory liability. Any costs in excess of the liability will be expensed as incurred and any residual liability in excess of incurred costs to retire the asset will act to reduce Orwell and Brainard’s future rates. As of June 30, 2015, none of the assets included in these asset classes have been retired.

Rate Case Costs

Rate case costs do not earn a return and will be amortized over a period of 2 to 3 years.